Thursday, August 25, 2011

Miners not following the metal

Micro Trader has posted some thoughts about the recent divergence between miners and the price of Gold. You can read the post in it's entirety, HERE.

Here is an excerpt from the post where some direction is given on how to deploy capital into Gold stocks in the current volatile market:
* Buy large producers in small quantities during the time of crisis and hold as we come out of the large “risk off” event — assuming the price of gold remains high. Investors will be prepared to pay a higher PE and the price of gold will have significantly increased earnings providing a “double whammy”.
* Buy small / medium producers who are likely to already be undervalued and on low forward looking PE’s. These companies may initially get sold down heavily purely on their size. Find companies that don’t need to raise money to begin producing Gold and they will re-rate very quickly once the money starts flowing in and a little bit of risk comes back into the market. These companies will also be takeover targets for larger producers.
The ideas here are quite reasonable.

It was during another large market rout in 2010 (the day after the May 'Flash Crash') that I deployed a large percentage of my Superannuation into ASX300 listed Gold stocks. Today those stocks (as a group) are roughly 65% higher than on the purchase date. Although they can be somewhat boring to watch day to day, the large cap stable Gold producers benefit from an increasing average Gold price as their margins increase from quarter to quarter.

The other important point from Micro Trader's post above is to look for companies who have substantial cash to make it through volatile times without the need to raise capital. I can't agree more with this point. Sticking to producers is obviously the safer option, but whether looking to buy small cap producers, developers or explorers during volatile times, ensure you take a look a good look at their financial position. Their quarterly reports will show their current cash position and expected cash outflows for the next quarter. During times like these you should be looking for companies that have at least 6 months (at their spend rate) in cash reserves, if not 12 months or more (especially for those with no income).

I do think that Gold miners will eventually reflect the price of the metal, but it's far from an easy ride. In the small cap sector especially there are far more losers than there are long term winners. Picking the right companies to back is difficult and it can be especially discouraging when they don't immediately reflect the increase in the price of Gold or Silver. Patience & persistence are going to be required to make money in these difficult times for the market.


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  1. Good advice BB.

    I've been following this whilst researching miners and will buy on the next dip.

    Your 65% return is very impressive!

  2. Thanks Dave. I think returns like this over the next 18 months will be possible. Will be looking to introduce a virtual portfolio very soon which will allow me to track and prove returns rather than just quote percentages and expect them to be believed.